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Individuals desiring to provide valuable resources to the community may be considering whether to start a nonprofit organization. A nonprofit operates under different rules than other business entities because its sole purpose is to benefit the public above earning a profit. Individuals desiring to start a grassroots organization or startup company should weigh the advantages and disadvantages of obtaining nonprofit status.

Corporate Protection

When a company forms a nonprofit, it comes under the many benefits of a corporate structure. One of the main benefits is that members of a nonprofit receive personal asset protection. This means that if a creditor sues the nonprofit because of an outstanding debt, the personal assets of those involved in the nonprofit are protected. As with a corporation, a nonprofit must establish a board of directors. The board provides the organization with leadership and strategic management. It establishes the rules of the organization and helps the nonprofit fulfill its mission.

Federal and State Tax Exemption

The main benefit of nonprofit status is the ability to avoid paying federal and state income taxes on profits. To receive tax-exempt status, you must apply with the Internal Revenue Service. Nonprofits with 501(c)(3) status are not obligated to pay sales taxes in many states. Tax exemption allows companies to use all of its revenue for the purpose of the nonprofit.

Fundraising Abilities

Acquiring nonprofit status gives you the ability to raise funds from the public. Fundraising rules vary per state, but nonprofits use several tactics to generate funds. The Internal Revenue Service makes fundraising easier for tax-exempt nonprofits by allowing donors to take tax deduction on contributions. Nonprofit status also allows you to apply for federal and state funding assistance. Millions of dollars are given to nonprofit organizations that meet governmental grant guidelines.

IRS Oversight

A company that obtains 501(c)(3) status must follow the rules regarding nonprofits established by the IRS. Nonprofits are required to file annual tax returns by completing Form 990. Failing to comply with the IRS rules regarding tax filing can result in the loss of 501(c)(3) nonprofit status. The IRS determines how a company can use its profits. Nonprofit organizations cannot distribute profits to members of the organization. You must use profits strictly for the purpose of fulfilling the mission of the nonprofit.

Fees

You must pay fees to file for state incorporation and apply for federal tax-exempt status, which is a disadvantage for many small nonprofits. The fees to apply for 501(c)(3) status are quite expensive, especially for organizations with small budgets. The fee structure is based upon your expected annual revenue. The application fee ranges from $450 to $850 at the time of publication. Some nonprofits pay attorney fees because they lack the experience to complete the paperwork needed to apply for federal tax-exempt status. States may also require registration fees for nonprofits to take charitable contributions.

Hiring Staff

Most states require nonprofits to have at least three directors: a president, secretary and treasurer. Although directors are not paid, the officers of a nonprofit generally receive a salary. For small nonprofit organizations, hiring staff comprises a large part of the budget. In new organizations, the majority of the officers work very long hours because they serve in several positions. Some nonprofits cannot afford to hire staff, which hinders the nonprofit’s ability to operate effectively.